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Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Granting Approval of Proposed Rule Change and Amendment No. 1 Thereto Adopting Rule 51, Enforcement of Capital Funding Fee

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Start Preamble September 28, 2001.

On December 6, 1999, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] a proposed rule change to adopt Phlx Rule 51, Enforcement of the Capital Funding Fee. New Rule 51 (“Rule”) permits the Exchange to take certain specified measures if an owner of a membership fails to pay (or have paid on its behalf) any capital funding fee imposed by the Exchange when due. The Phlx filed an amendment to the proposal on August 9, 2001.[3]

The Rule specifies what enforcement action may be taken against an owner for failure to pay any capital funding fee imposed by the Exchange. The Exchange represented that a new rule is required because existing Exchange rules do not comprehensively address situations in which owners, as opposed to members or member organizations, are required to pay the Exchange any fees. The Phlx Board determined that the enforcement mechanisms outlined in the Rule were necessary to effectuate the Exchange's capital funding fee, a central aspect of the Exchange's capital plan, for the continued viability and competitiveness of the Exchange.

The Rule delineates the remedies that shall be taken by the Board if the capital funding fee is not paid. The Rule allows for a variety of remedies ranging from the imposition of a late fee to reversion and sale by the Exchange of the equitable title to a membership. The remedies are set forth in such a way as to apply the less onerous remedies (i.e., like fees) first and the more serious remedies (i.e., suspension of right to trade or lease and reversion of membership) only after the Exchange has not received payment within 90 days after the date of the original invoice (or such longer period for which a lease agreement is in effect as a result of the election by a lessee to continue paying the capital funding fee). By allowing this graduated scale of remedies, the owners are put on notice as to what remedies will be imposed if payment is not received in a timely manner, with the more serious remedies being applied after a longer period of time. In addition, the Rule delineates the Board's responsibilities and authority for handling instances in which an owner fails to pay the capital funding fee when due. The Rule is designed to protect innocent lessees from being unexpectedly dispossessed from their memberships and trading rights in the event of a nonpayment by their lessors. By electing to pay the capital funding fee on behalf of an owner, the lessee may continue trading under his/her existing membership for up to three months. At the end of this period, or in the event that the lessee elects not to pay the fee on behalf of the lessor, the lessee may apply for temporary trading privileges.

The proposed rule change, as amended, was published for comment in the Federal Register on August 29, 2001.[4] The Commission received no comments on the proposal.

The Commission finds that the proposed rule change, as amended, is consistent with the Act and the rules and regulations under the Act Start Printed Page 51085applicable to a national securities exchange [5] and, in particular, the requirements of Section 6 of the Act [6] and the rules and regulations thereunder. The Commission finds specifically that the proposed rule change is consistent with the requirement of Section 6(b)(5) [7] because it is designed to promote just and equitable principles of trade and to protect investors and the public interest by providing for enforcement action in the event that an owner fails to pay capital funding fee. The proposed rule change is also consistent with Section 6(b)(5) of the Act [8] because it enables lessees to continue trading on the Exchange even when their respective lessors fail to pay fees owned to the Exchange when due.

The Commission is not required under Section 19(b)(2) of the Act [9] to find that a proposed rule change by a self-regulatory organization is lawful under state corporation law; in approving this proposal, the Commission is relying on the Phlx's representation that it has the general power under applicable provisions of Delaware law to adopt the Rule. The Commission is also relying on the Phlx's representations that the Rule is permissible under Pennsylvania contract law. The Commission has not independently evaluated the accuracy of Phlx's representations regarding Delaware or Pennsylvania law.

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[10] that the proposed rule change, as amended, (SR-Phlx-99-52) is approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[11]

Margaret H. McFarland,

Deputy Secretary.

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3.  See Letter from Cynthia Hoekstra, Counsel, Phlx, to Nancy Sanow, Assistant Director, Commission, dated August 8, 2001 (“Amendment No. 1”). In Amendment No. 1 the Phlx represented that the Rule complies with Delaware corporate law, Pennsylvania contract law, and the Exchange's Certificate of Incorporation, by-laws, and rules. In addition, the Phlx modified the timing of the enforcement procedures for failure to pay the capital funding fee and included a provision for equitable reversion.

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4.  See Securities Exchange Act Release No. 44733 (August 22, 2001), 66 FR 45716.

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5.  In approving this proposed rule change, the Commission has considered the proposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 01-24976 Filed 10-4-01; 8:45 am]